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Why Dividends?

Cold, hard moola is good for your portfolio.

It's that time of year, kids. The crisp breeze of fall fills the air. Football is back. And the new season of TV-hit wannabes calls a siren song to the couch potato in you. It's a good time of year. Unless, of course, you're headed back to school after a long, sleepy summer. (I know, I remember those days.)

But school doesn't have to be dull and boring. Heck, learning is good for you. It's also good for your portfolio. That's why we Fools are always in a learning mood. (Seriously, it's in our motto: to educate, amuse, and enrich.) So put on your belled cap and pay attention -- class is in session. Today, we're going to talk about what might be the best way to guarantee positive returns for your portfolio. That's right: It's time to meet your new friend, the dividend.

What is a dividend anyway?I'll pass the buck on this to fellow Fool Selena Maranjian since she already answered this most excellently in The Motley Fool Money Guide. This definition comes directly from that text:

"A dividend is a portion of a company's earnings that the firm pays out to its shareholders. If the Tattoo Advertising Co. (Ticker: YOWCH) is earning roughly $4 in profit per share each year, it may decide to issue $1 annually to shareholders and use the rest of the money to help build the business. If so, it will probably pay out $0.25 per share every three months. ... This may seem like a pittance, but it adds up. If you own 200 shares of a company that's paying $2.50 per share in annual dividends, you'll receive $500 per year from the company."

Got that? A dividend, quite simply, is part of your share of the profits of a company you own, usually paid quarterly and in cash. Not that you'll see a check. Typically, your broker will receive the proceeds and deposit them straight to your brokerage account. Sounds good, right? Yep. But there's even more to like. Read on.

A few A+ stocksMany stocks have established a tradition of raising their dividends annually. Motley Fool Inside Value pick Coca-Cola(NYSE:KO) has been among them. Indeed, as Selena pointed out in the Money Guide, had you bought one share of Coke in its first year, by 2001 you'd have had more than 97,000 shares and would be earning more than -- wait for it -- $58,000 in dividends annually. The company has also raised its payout for 42 consecutive years.

Which are the best dividend payers, you ask? This is actually pretty easy to find out. Financial media company Mergent tracks what it calls a list of "dividend achievers" each year. These companies boast a record of growing their payouts substantially over 10 years or more.

Mergent publishes its guide quarterly. You can find the latest here. Better yet, go to your local library and photocopy the key lists as I did. Here are the top five in terms of the longest record for boosting dividends, as ranked by Mergent:

Company

Years of Dividend Increases

DividendPer Share

Current Stock Price

American States Water(NYSE:AWR)

51

$0.90

$32.51

Diebold(NYSE:DBD)

51

$0.82

$46.00

Procter & Gamble(NYSE:PG)

51

$1.12

$56.90

Dover(NYSE:DOV)

49

$0.68

$40.78

Emerson Electric(NYSE:EMR)

48

$1.66

$68.15

Sources: Mergent's Dividend Achievers, Yahoo! Finance

Put your cash to workNaturally, many of these are old firms in very staid, slow-growth industries. And you'd think that would be a disadvantage, right? Sure, but you'd be wrong. Consider that P&G, the king of such consumer staples as detergent, has been more than a 25-bagger over the past 20 years. That rivals the 27-bagger you'd have if you had bought and held resurgent Rule Breaker Apple Computer(NASDAQ:AAPL) from its earliest days in 1985. And you'd have exposed yourself to far less risk along the way. (Besides, ask yourself: Do you really believe you'd have held Apple during the dark days of the Gil Amelio era? Don't lie.)

P&G's remarkable gain was fueled by reinvested dividends. Yes, the company has had its ups and downs since the mid-1980s, but the enterprising investor who held on would have steadily bought more shares on P&G's dime -- and often on the cheap. That, in turn, would have increased his payout, which would have created more buying power. Get it? Reinvesting dividends is a lot like compound interest. The longer it sits, the more it earns. Best of all, reinvesting dividends to buy new shares is a free service at many discount brokerages. (Find out more at our Discount Broker Center.)

Now, do you really want to bet your portfolio on the next eMeringue? I didn't think so. Class dismissed.

Go on, take the money and run. Take a risk-free trial to Motley Fool Income Investor today and you'll get access to all of the picks and research that have helped chief analyst Mathew Emmert beat the market by more than 10% as of this writing. And there's never, ever an obligation to buy. (Though if you do, the service is backed by our money-back guarantee, no questions asked.)

Fool contributor Tim Beyers loves it when tech stocks pay him dividends. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking Tim's Fool profile, which is here. The Motley Fool has an ironclad disclosure policy.

Author

Tim Beyers first began writing for the Fool in 2003. Today, he's an analyst for Motley Fool Rule Breakers and Motley Fool Supernova. At Fool.com, he covers disruptive ideas in technology and entertainment. Find him online at timbeyers.me or send email to tbeyers@foolcontractors.com. For more insights, follow Tim on Twitter.